“Drive-Thru Retirement Project: Monthly Dividends” Solved

by Travis Johnson, Stock Gumshoe | April 3, 2008 11:46 am

Whatever they’re paying the copywriters at Stansberry & Associates, it’s not enough. This stuff is pure gold[1]! Drive-Thru Retirement … now that’s a good idea. I’ll take the Super Size Value Combo, please!

The latest ad from S&A is for a new service they’re providing, a monthly dividend tracking system of some kind, which essentially looks like a special report that you buy for $250, then periodic updates to their list of the best companies to buy, all of whom apparently pay monthly dividends[2].

The idea of getting a monthly dividend, instead of the more typical quarterly (or, for foreign firms, semiannual) dividends, clearly holds a lot of appeal for people. I don’t know if it’s just the satisfaction of getting that dividend check every month, or the convenience for people who actually live off their dividends, or if it’s the fact that these companies tend to be very dividend-focused, which is also usually an indication of shareholder-friendliness. Of course, the actual yield you get as a dividend is the really important thing, whether it’s annual, quarterly, or monthly, is what should be of preeminent importance — but there’s no denying the fact that lots of investors love monthly payments.

So essentially what’s being teased here is a service that will help you find the best companies that make monthly dividend payments, in order to help you build a portfolio of these high dividend companies. That’s obviously not for everyone, but clearly dividend payers (though not necessarily high yielding dividend payers) should be a significant portion of most peoples’ portfolios — if we’ve learned anything from the gyrations of the market, it should be that there is nothing new under the sun … and for the last century, a huge portion of the overall returns from the stock market have been thanks to dividends.

But the prominent tease is of one particular investment — the “Drive Thru Retirement Project” of John and Helen Scott. Here’s the story in a nutshell:

“In short, John and Helen Scott figured out a financial secret of the fast-food industry, which pays an absolute fortune over the long run. They started nearly 40 years ago, with a local Southern California restaurant you’ve almost certainly heard of: Taco Bell.

“Essentially, the deal went like this…

“Back then, Taco Bell was a young business. They were doing well, and wanted to build more stores. To expand, they needed cash.

“So the Scotts offered a simple proposition: In exchange for ownership of the Taco Bell building, the Scotts gave the Taco Bell owners the cash they needed.

“As part of the deal, the Taco Bell owners agreed to lease the building back from the Scotts for a period of 15+ years. And… get this… the Taco Bell owners agreed to pay for EVERY SINGLE BUILDING EXPENSE: maintenance… taxes… insurance… upkeep… plumbing… everything from changing a light bulb to repaving the parking lot.”

That’s just a net lease arrangement, which is not that unusual — and I don’t expect that the Scotts, whoever they are, invented it. But it certainly holds appeal for landlords, for obvious reasons. Not doing much management work on the building means you lose some opportunity to increase your profits, but it also means you have almost no expenses and the people who really care about how the building looks and works — the folks who are using it — are responsible for that upkeep. This kind of sale/leaseback arrangement is not that unusual today, it’s used across industries for all kinds of expensive capital goods and property, anything that companies need but that would prefer not to carry on their balance sheets.

The lessor, of course, gets a pretty good deal, too — if it’s a growing company, or a company that wants to grow, they get to sell their building but keep long term access to it, and they can use the money they got in the sale to expand elsewhere.

So … they focus on retail establishments, not just fast food joints but all kinds of “life maintenance” retail — grocery stores, pharmacies, etc. The company’s idea is that this keeps things simple and reduces risk, since there is always local demand for local services like food, medicine, and the other necessities of daily life.

The firm has delivered 453 consecutive monthly dividend payments, which, for the arithmetically challenged, is almost 38 years (just a couple months to go).

That’s enough to identify them, so let’s feed this data into the Thinkolator …

This “Drive Thru Retirement Project,” apparently having some relationship with John and Helen Scott, is …

Realty Income (O)[3]

Cool ticker, huh? By the way, I just checked, and there is a security with the ticker “OOO” — but in a great lack of imagination, there is not yet an “OOH” or, on the Nasdaq, an “OOOH”. Too bad.

This company may sound familiar to Stock Gumshoe readers from way back — it has been a favorite of Tom Dyson[4], who runs the 12% Letter over at Stansberry & Associates, for quite some time, and I’ve noted it once or twice before.

And this is a situation where they haven’t dramatically overpromised — Realty Income is really a monthly dividend payer, they really have paid a dividend for almost 38 years and grown the dividend very dramatically over that long timeframe (though they’ve only been a public REIT for about 14 years — they ran a series of real estate[5] partnerships before that), and they are extremely focused, from top management down, on being an income company. Their goal is to grow the dividend, pure and simple. So that’s certainly something many folks appreciate.

In some ways, this is probably a very effective way of doing what local folks in cities across the country have done for generations when they build up a little bit of family wealth — buy a little strip mall center or other commercial real estate and slowly grow the net income that you get from that center. And as you might imagine with such a situation, it’s not a way to get rich quick — it’s a way to commit your capital in a way that maximizes your income and, hopefully, continues to grow and provide income for future generations. Realty Income yields about 6% a year at the current price, but do keep in mind that it’s a REIT so this is a dividend that’s likely to be taxed as income, not eligible for the lower 15% dividend tax.

A quick look at the corporate website[6] will tell you quite quickly that this is a company that has investors in mind — it’s clearly geared to individual investors, and they’ve even registered the name “The Monthly Dividend Company” to make clear what their purpose is. They do a pretty good job of explaining themselves, so I won’t recap all of it for you.

I have nothing particularly bad to say about this company — they are widely seen as a low-risk, capital-protecting, yield-producing company that is focused on individual investors. That doesn’t mean that this is the best time to buy the shares, or that this type of investment is for everyone, of course. It also doesn’t mean that there’s no risk — they try to stay balanced, but from time to time they make pretty big acquisitions (a few years ago they bought a huge number of CVS locations, for example) that give them outsize exposure to a particular company’s fortunes. They claim to be very careful about managing this risk and trying to rediversify after such large transactions, and they research their tenants carefully, but no one is perfect or perfectly prescient.

The shares have been fairly volatile in the past year or so, trading between $20 and $30, but are now right in the middle of that range at about $25. Institutional interest has grown signficantly in the last few years, from probably 20% or so up to the current level above 40%, so I have no idea whether that contributes to the volatility. My assumption is that most of the income-oriented individual investors in this one just buy and hold and are unlikely to trade in and out very often, but perhaps that assumption is wrong.

They have raised the dividend religiously, bumping it up every quarter for the last 12 years, though usually by very tiny amounts each time. In terms of historic valuation, the shares look a little bit cheaper than they have been for much of the past five years, but not dramatically so. Analysts are not crazy about the firm, and they’ve gotten a few downgrades in recent months, but that seems to be largely because analyst expectations for the net lease industry are pretty low.

Realty Income is reliant to some degree on the financial markets — they carry a line of credit that allows them to buy properties, but they then try to quickly sell common or preferred stock or bonds to finance acquisitions for the long term, so they do carry about $1.5 billion of debt — not particularly a lot, that’s a debt/equity ratio of about 1. The debt level is similar to near-peer Kimco which focuses on similar kinds of properties to some degree, but much, much lower than the big shopping center/regional mall owners like Simon Property Group or General Growth Properties. And as they issue stock they technically dilute ownership, but usually it’s just because they’ve bought more properties so it’s rarely dilutive to earnings for long, if at all. Given the turmoil in financial markets, it would be foolish to say that there’s no risk here, though this type and level of risk wouldn’t worry me too much (keep in mind that I might be very different than you).

As to the Scotts — to tell the truth, I’m not sure if they exist or not, or whether this is a pseudonym or if John and Helen Scott are just early players in the company’s history in some way. It doesn’t particularly matter, the other clues are right on target for these folks, and it’s a fairly unique company.

There is, by the way, a growing and similar company in Canada[7] that coincidentally carries the Scott name — Scott’s REIT (SRQ in Toronto) is much smaller and more focused, owning as they do almost nothing but fast food restaurant buildings, but they also pay a monthly dividend and try to grow that dividend. Might be worth a look if you’re interested in this concept — the dividend is higher, closer to 10%, but they are also a bit riskier because of the lack of diversification (they essentially hold real estate that’s tied to just one company, a large franchise owner that runs fast food restaurants across Canada). Maybe there’s some connection between these Scotts and the Scotts teased by Stansberry’s folks in this ad, maybe not.

So … I know a few of my readers hold shares in this one, and others have at least looked at it. What do you think?

P.S. There were several other monthly dividend payers briefly teased in this ad — if there’s a lot of interest I’ll try to track them down. I expect that many of them will be trusts, REITs[8] or publicly traded partnerships, with probably a fair proportion of North-of-the-border firms since Canadians particularly having a tradition of income stocks that pay monthly dividends, but I haven’t checked them out yet.

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